Thursday, March 28, 2024
HometransportationInvesting in transports: Analysts make their picks

Investing in transports: Analysts make their picks

Since the start of 2015, it's been a rocky road for transportation stocks. But that may be changing.

A truck loaded with cargo sets out from Kansas City, Mo.Justin Solomon | CNBC

The Dow Jones Transportation Average has shed more than 5 percent of its value since the start of the year, underperforming the broader stock market and posting its first quarterly loss in nearly two years. Worse yet, the index recently closed below its 200-day moving average, a key technical level that some worry could signal the start of an even steeper selloff.

Investors have been rotating out of transports in anticipation of expected weaker first-quarter earnings. As the has climbed to record highs this year, the sector has essentially moved sideways since November. That divergence has raised the jitter factor among traders and analysts.

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Shares of companies that focus on the transportation of industrial goods and commodities may be particularly worrisome, as low energy prices cut into demand for goods associated with oil drilling and manufacturing. Meanwhile, a is eroding foreign appetite for U.S.-derived commodities like coal and grain.

Keep on trucking

But for those willing to ride out the volatility, analysts say the broad selloff has also created some buying opportunities in key sectors.

"Stick with the truckload sector," said Jason Seidl, a managing director at Cowen and Company covering transportation stocks. "We have a pretty tight marketplace, with prices going up for the first time in many years."

Rates charged by trucking companies rose last year, and analysts largely expect that momentum to continue in 2015. Seidl sees prices climbing another 5 percent.

On the heels of crude oil's collapse, a gallon of diesel is now more than a dollar cheaper than it was a year ago. Full-truckload (TL) companies are among the biggest beneficiaries, and Seidl recommends those over names focused on less-than-truckload (LTL) operations.

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Cheaper fuel lowers operating costs, but it can also make trucking an attractive option to railroads, as lower diesel makes the cost of hauling freight over longer distances via truck cheaper.

Avondale Partners chief market strategist Donald Broughton added that, unlike railroads that transport commodities, the trucking group tends to do well when the dollar is strong. That's because many of those companies have largely domestic operations that are insulated from currency fluctuations, and they move consumer-oriented goods like those found at the big box retailers.

"Simply put, the cost of fuel and the value of the dollar hurts rails, and helps trucks," Broughton said.

Broughton and Seidl both recommend Swift Transportation, Knight Transportation, and a small-cap stock called Covenant Transportation Group, which recently hiked its first-quarter profit forecast by more than double its previous estimate, unlike other peers. Broughton also recommends Werner Enterprises.

However, one headwind to watch is a potential shortage of labor. According to the American Trucking Associations, the industry is in need of 35,000 to 40,000 drivers immediately. While higher wages have decreased the turnover rate for current drivers, the national trade association said the biggest companies still experienced an astounding 95 percent churn rate in 2014.

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